Spend Right

Spending is the default use of money we have. Our money is more useful if we spend it consciously. There are people who earn much more than the average person but their lifestyle expenses are so high that they have very little left to invest for the future. Anyone’s financial wellbeing is equally dependent on income as well as spending habits.

Emotional Aspects

Emotions play a very critical role while making spending decisions and managing one’s finances effectively. Several emotions can lead to spending unwisely.

Impulse

Impulse buying often occurs when we feel a sudden urge or desire to purchase something without much thought or consideration. This impulse can be driven by emotions such as excitement, anticipation, or even boredom.

Instant Gratification

Instant gratification is when you want something and you want it right away, without waiting or putting in much effort. It’s like when you crave a chocolate chip cookie and you go grab one from the kitchen immediately instead of waiting to bake a batch. It’s all about satisfying your desires instantly rather than delaying or working towards them. This desire for instant gratification can prompt us to spend impulsively on items that provide immediate pleasure or satisfaction, even if they aren’t essential or align with our long-term goals. This emotion can override rational decision-making and lead to overspending.

Fear of Missing Out (FOMO)

FOMO is the anxiety or apprehension that others are enjoying experiences or possessions that we’re not. This fear can lead to impulsive purchases driven by the desire to keep up with others or avoid feeling left out.

Social Pressure

All of us want to be an important member of our social groups. Social influences from peers, family, or social media can contribute to spending unwisely. We may feel pressure to maintain a certain lifestyle, follow trends, or meet others’ expectations, leading to spending beyond our means. Trying to maintain a fake image of being wealthy by buying expensive clothes or other personal items can lead to financial disaster.

Stress or Emotional Distress

During times of stress, sadness, or anxiety, some people may turn to retail therapy (shopping just to feel good) as a way to cope with their emotions or distract themselves from their problems. However, this way of dealing with emotional issues can result in overspending and financial strain. Instead of using shopping as a way to feel good, find other activities that bring you joy and fulfillment, like spending time with friends, exercising, or pursuing hobbies.

Advertising and Marketing Tactics

Advertisers often use emotional appeals to persuade consumers to make purchases. Emotions like happiness, nostalgia, or even fear are commonly leveraged in advertising to create a sense of urgency or desire for a product or service.

Low Self-Esteem or Insecurity

Some individuals may use material possessions as a way to boost their self-esteem or project a certain image to others. Spending unwisely on luxury items or status symbols can be driven by a desire to feel valued or accepted by society.

Lack of Self-Control

Poor impulse control or difficulty in delaying gratification can contribute to spending unwisely. Without the ability to resist immediate temptations or prioritise long-term goals, individuals may engage in impulsive or excessive spending behavior. To avoid such temptation, remind yourself by reading your financial goals. It will generate a sense of self discipline when you encounter that what you want to spend today can harm/delay your possibility of achieving something more important like, building a house, going on family vacation, child’s education, retirement needs etc.

Overconfidence

Overconfidence in one’s financial situation or investment skills can lead to excessive risk-taking or overspending. This sense of false confidence can blind individuals to potential consequences and results in financial mismanagement.

Escapism

Some people may use shopping or spending as a form of escape from reality or boredom. The temporary distraction and sense of pleasure derived from acquiring new possessions can provide a short term relief from life’s challenges, but it often comes at the expense of financial well being. By getting an iPhone on EMI one cannot escape his/her way out of dependency on 9-5 work.

Recognising and understanding these emotions can help us develop strategies to manage our spending habits more effectively and make wiser financial decisions in the long run.

Spend Wisely

Spending wisely is crucial for financial stability and achieving our long-term goals. Here are some ways to help you spend your money wisely.

Differentiate Between Needs and Wants

Before making a purchase, ask yourself if it’s a necessity or a discretionary expense. Focus on meeting your needs first, such as food, housing, and healthcare, before spending on wants like entertainment or luxury items. You must also keep enough money to be able to pay for these needs even when your regular income falters.

Create a Budget

Tracking your income and expenses helps you to understand where your money is going. Then, create a budget that allocates funds for essential expenses, savings, and discretionary spending. Stick to your budget as closely as possible to avoid overspending.

Set Financial Goals

Define short-term and long-term financial goals, such as building an emergency fund, saving for a down payment on a house, or funding your retirement. Having clear goals can motivate you to prioritize saving and curb unnecessary spending.

Avoid Impulse Purchases

Take time to consider your purchases instead of giving in to impulse buying. Ask yourself if you truly need the item and if it aligns with your financial goals. Consider implementing a waiting period before making non-essential purchases to reduce impulse spending.

Compare Prices

Before making a purchase, compare prices from different retailers or suppliers to ensure you’re getting the best value for your money. Look for discounts, promotions, or coupons that can help you save on your purchases. Also be mindful of the total savings after considering the cost (fuel etc) and time (browsing and analysing the alternatives ) needed to travel to buy at a discount.

Practice Mindful Spending

Be conscious of where your money is going and the impact of your spending decisions on your financial well-being. Consider the value that purchases bring to your life and whether they align with your priorities and values. Do not compare what someone else has bought with your purchase because that person is already busy doing that. Live your own life.

Limit Credit Card Use

Credit cards can make it easy to overspend, especially if you don’t pay off the monthly outstanding and pay only the minimum at huge interest charges. These interest payments slowly take away your hard earned money. Use credit cards responsibly by paying off your balance in full each month to avoid accumulating debt and paying unnecessary interest.

Automate Savings

Set up automatic transfers from your checking account to your savings or investment accounts to ensure you’re consistently saving money. Treat savings as a non-negotiable expense and prioritise it in your budget. Spend only the money which is in excess of all committed monthly savings/investments.

Review Regularly

Periodically review your spending habits and financial goals to identify areas where you can cut back or reallocate funds. Adjust your budget as needed to reflect changes in your income, expenses, or financial priorities.

Seek Value, Not Just Price

When making purchasing decisions, consider factors beyond price alone, such as quality, durability, and long-term value. Sometimes, paying a higher price upfront for a quality product can save you money in the long run by reducing the need for replacements or repairs. At the same time you may be paying a premium for just the brand value and the same quality item may be available at a much lower price. Use your money rationally.

Spend on Experiences

Spending money on experiences, such as travel, offers more lasting satisfaction than acquiring material possessions. Experiences create lasting memories, stimulate personal growth, and strengthen relationships. Owning stuff brings temporary joy and eventually clutters our living space. Prioritising experiences over items helps avoid the cycle of diminishing returns, reduces stress from cleaning & maintenance, and enhances overall well-being. By allocating resources to experiences and mindful consumption, we can achieve a richer, more fulfilling life filled with cherished moments.

Lifestyle Inflation

Lifestyle inflation refers to the tendency for individuals to increase their spending as their income rises. While this may seem harmless in the short term, it can have hidden long-term consequences, especially if spending outpaces income. Lifestyle inflation can lead to a higher cost of living, increased financial stress, and reduced savings for future goals.

We should be disciplined on expenses and keep on finding ways to increase our income. At anypoint of time, the sum total of all depreciating items one owns (that takes away our money) must be upto 10% of our net worth (all assets – liabilities).

By keeping all these in mind, you can develop smart spending habits that align with your financial goals and priorities, ultimately leading to improved financial well-being and peace of mind.